DHAKA, Bangladesh—In the last week of October, a supplier for Wal-Mart Stores Inc.WMT-0.25% placed an order with garment-maker Simco Bangladesh Ltd. to produce 300,000 girls' shorts for shipment in early December, according to a senior Simco executive.

Many of the world's biggest brands have turned to Bangladesh as a low-cost production base, and Wal-Mart has become the largest buyer, sourcing more than $1 billion in garments annually, according to the Bangladesh Garment Manufacturers and Exporters Association.

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What happened with Wal-Mart's order illustrates the pitfalls of doing business here. Facing capacity constraints, Simco subcontracted the work to another company without Wal-Mart's authorization, the Simco executive said. Wal-Mart, which said it has strict rules for factories manufacturing its orders, declined to respond to specific queries about the shorts order.

When the subcontractor's factory, which was also making clothes for Sears Holdings Corp.SHLD1.22%, the European retail chain C&A and others, burned down in late November, killing 112 workers, it exposed the lines that some Bangladeshi manufacturers are willing to cross to get the work done—and the increasing tension and deteriorating labor relations that have gripped an industry that is a lifeline for the Bangladesh economy.

The apparel industry accounts for 80% of this poor South Asia nation's exports, and it's one reason why the country's economic fortunes have been rising. Bangladesh exported $19 billion in clothing last year, second only to China and double its overseas sales five years ago.

Investigators are still studying the cause of the fire and looking into reports that workers were trapped inside the factory because managers locked the doors to prevent employees from stealing garments. The garment industry association says that most of the apparel industry's factories meet fire-safety standards. Foreign retailers say they have also made efforts to improve safety.

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The fatal fire occurred at a factory in Ashulia, an industrial zone north of Dhaka, Bangladesh's capital.
MRK Palash for The Wall Street Journal

But the aftermath has renewed attention on the industry's working conditions and exposed holes in retailers' efforts to vet factories for safe practices. It is also causing rising discontent among workers: On Monday, some 10,000 people clashed with police, forcing the closing of 50 factories.

The fire occurred at a factory in Ashulia, an industrial zone north of Dhaka, Bangladesh's capital. How the factory came to be making clothes for Wal-Mart on Simco's behalf helps illustrate how the industry works. It also happened, the Simco executive noted, amid a crush of work and tight deadlines.

In Ashulia, workers, who generally enter the industry at the government's monthly minimum wage of $37 a month, have increasingly gone on strike, demanding higher pay and better conditions.

Factory owners have responded by locking the workers out for days at a stretch. Police have also arrested scores of protesters. Local news reports of the death of a garment-workers activist, Aminul Islam, who was discovered in April with signs of torture on his corpse, have added to the tense atmosphere.

As a result, many employees from Bangladeshi villages who worked in the industry have opted to stay home rather than return to the factories, workers' groups say.

"Many workers went back to their villages because of criminal charges filed by factory owners" related to the protests, adds Babul Akhter, president of the Bangladesh Garment and Industrial Workers Federation.

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Many factories, including one owned by Simco, the manufacturer that got the Wal-Mart supplier's order, have faced worker shortages. The senior Simco executive, who declined to be identified, said the factory couldn't complete Wal-Mart's order because 380 workers failed to return after celebrations for the holy day of Eid al-Adha.

Instead, Simco decided to subcontract the job to one of Bangladesh's thousands of other manufacturers, a standard practice in the industry, according to factory owners.

Tuba Group accepted the order, and in early November, Simco signed an agreement to transfer the fabric it had imported duty-free to Tuba Garments, a Tuba Group unit.

As part of their effort to ensure that the factories that make their clothes meet safety and other requirements, Wal-Mart and other big retailers have rules about when their orders can be passed on to another manufacturer.

Wal-Mart, for instance, says that it is the suppliers' responsibility to use factories approved by the company, and it warns in an extensive manual that suppliers can be banned from doing business with it if they fail to get that approval.

Simco was familiar with those rules, because it has been making clothes for Wal-Mart for more than a decade and sells 70% of its production to the company, the senior Simco executive said. Yet he said Simco sent the girls' shorts order to Tuba Group without Wal-Mart's prior approval.

The executive said Simco believed this was acceptable because some of Tuba Group's factories had been approved to make clothes for Wal-Mart. Indeed, a document on Tuba Group's website indicates that Tuba Garments, the unit that contracted with Simco, underwent a successful Wal-Mart audit in July 2011. Wal-Mart declined to comment on whether Tuba Garments is currently a supplier.

But the shuffling didn't stop there.

Tuba Group has a history of moving orders between its factories, and it had gotten into trouble with Wal-Mart for this before, according to another document on Tuba Group's website. The document lays out details of a January 2011 audit of Tuba Textile Mills Ltd. that found that Tuba officials had broken Wal-Mart's rules by allowing one of its nonaudited factories to stitch labels onto garments.

Nonetheless, Tuba Garments passed the shorts order onto yet another Tuba Group unit called Tazreen Fashions Ltd. without seeking permission, according to the Simco executive.

ENLARGE

A photo taken at Tazreen Fashions, the factory in Ashulia, Bangladesh, where a fire killed at least 112 people on Nov. 24.
MRK Palash/The Wall Street Journal

Wal-Mart said in a statement last week that it had previously banned Tazreen Fashions from making its clothes but provided no other details.

A series of social audits—or checks by third parties that factories are safe, don't use child labor and follow other rules—turned up problems at Tazreen Fashions' factory, according to a document on Tuba Group's website and third-party auditors.

Wal-Mart declined to comment on the details of the audits of any Tuba Group companies. It said that its supplier, which it declined to identify, had sourced garments from Tazreen Fashions without authorization and that it had terminated its relationship with the supplier after the fire.

According to Bangladeshi media, Mr. Hossain said at a news conference last week that he believes the fire may have been an act of arson. In interviews, he also said that social audits carried out for Wal-Mart didn't raise fire-safety issues at Tazreen Fashions.

An auditor for Wal-Mart, U.K.-based Intertek GroupITRK0.37% PLC, found Tazreen Fashions to be "high risk" during an inspection over a year ago, according to Mamun Zaman, a Bangladesh-based operations manager with Intertek.

Mr. Zaman said third-party companies such as his check factory safety and conditions but don't necessarily know if unauthorized subcontracting occurs among companies that are part of a larger group.

Sanjida Khatun, a garment worker who says she was employed by Tazreen Fashions for two years but left in October, said she never took part in fire-drill training while working at the factory. "We never had a safety drill and were never told what to do in case of a fire," she said.

Sears also said it didn't know its clothing was being made at the Tazreen factory. It added that it had fired the supplier responsible, which it identified as International Intimates Inc. The New York-based supplier didn't respond to requests to comment.

Siddiqur Rahman, vice president of the garment manufacturers group, said Wal-Mart's supplier had placed orders totaling 2.4 million pairs of shorts with at least 10 factories, including the one owned by Simco. The decision by Wal-Mart to end its relationship with the supplier, effectively canceling the orders, could cause losses of up to $7 million and put 20,000 workers out of jobs, Mr. Rahman said.

Pressure from foreign retailers has helped improve some conditions for workers, including nearly eliminating child labor from the garment industry, workers' groups acknowledge.

Bangladeshi officials say that further improvements in working conditions and wages will cost money but that foreign retailers have been loath to pay more to finance such measures.

"The buyers write to us to improve working conditions. We asked them to raise prices by 25 cents per clothing unit that would go to workers' welfare. They refused, citing the financial downturn in their countries," said Mikail Shiper, a senior official in Bangladesh's Ministry of Labor and Employment.

Retailers say they have been working to improve their sourcing practices. Wal-Mart, which works with around 100,000 suppliers, said that last year it asked them to stop working with 155 factories. Roughly a third of those were in Bangladesh.

Labor groups have persuaded some retailers to offer financing to help improve fire safety in Bangladeshi factories.

But a Wal-Mart executive, speaking at a meeting last year with other retailers and organized-labor groups, said that "it is not financially feasible for the brands to make such investments," according to members of the labor group Clean Clothes Campaign.

Wal-Mart said the comment was taken out of context. "We firmly believe factory owners must meet our standards," said Kevin Gardner, a company spokesman. "We recognize the cost of meeting those standards will be part of the cost of the goods we buy."

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